The S&P 500 Index is currently yielding 1.62%. This number is often used as a yardstick for assessing the magnitude of a stock’s dividend. If it is used, it should be used only as a floor or a minimum level, as it is very misleading as an average. Here’s why.
As of the time of this writing the following companies make up the top 25% of the S&P 500:
- Apple, Inc. [AAPL] – 0.60%
- Microsoft Corp [MSFT] – 0.95%
- Amazon.com Inc [AMZN] – 0.0%
- Meta Platforms Inc [META] – 0.0%
- Alphabet Inc [GOOGL/GOOG] – 0.0%
- Berkshire Hathaway Inc [BRK.B] – 0.0%
- Tesla Inc [TSLA] – 0.0%
Those percentages aren’t adding to 25%, so they’re clearly not the weights. They are the current dividend yields! Only 2 of the 7 pay a dividend and they are paltry at that.
There’s Facebook up there hiding under its new name and also Google, which gives itself away via its ticker symbol. But we also have Warren Buffet’s Berkshire Hathaway in the mix. That’s right, billionaire and arguably the greatest investor of all time, who is a massive proponent of dividend paying stocks, does not pay a dividend and to my knowledge never has. Now, that may have more to do with the special corporate structure that is Berkshire Hathaway, but here is the point. There is a rather large percentage of the S&P 500 not paying a dividend and so the 1.62% yield is not necessarily a good standard to use when assessing the value of a stock’s dividend. The average of the dividend paying stocks is clearly higher than 1.62%.
A Good Dividend Yield
Personally, I consider 2% to 4% a good dividend and if it is lower than 2%, I like to see that the company is at least raising their dividend by a substantial amount each year. Here, too, I like to see at least 2% as that is the Fed’s own target for inflation. In other words, we want this passive income stream to climb at least as fast as the cost of goods and services. Are there exceptions? Of course, but use these percentages as a rule of thumb.
A High Dividend Yield
Above 4% and we’re dealing with a high dividend yield. Why 4%? Well, it is a bit of a sweet spot. There are many companies paying less than 4%, and above 5% you really start to see fewer corporations. Above 5% you have plenty of MLPs, BDCs, and REITs and those entities are legally obligated to payout a large percentage of their income as dividends. However, those entities also bear economic sensitivities (think risk) that warrant those yields.
Above 4% we still have safety, but we start to call it into question. There are a number of reasons why a yield can go higher still, climbing well into double digits. Sometimes it is the sign of a troubled company.
I am going to do my best to build this Dividend King portfolio for the ages such that it yields 4%, carefully scrutinizing all of the stocks, particularly those yielding over 4%. I will purchase my next Dividend King on Monday. Find out which one it will be this weekend!